Protecting the crown jewels: How to deal with international trade secrets theft

In this three-part series, we present a hypothetical case study on fictitious U.S. company “SFilm,” drawn from a range of actual litigation experiences, that lays out the varied elements of an international trade secret strategy, and identifies the most common pitfalls that arise.

“We’ve now concluded our patents in Asia are worthless.”

This is the sentiment from many general counsel of top corporations who find themselves the target of competitors, particularly non-U.S. companies, whose core business strategy involves stealing technology to “leap-frog” substantial investments that U.S. companies have made for years, if not decades. Their technology ambitions are consistent with those of their governments. As China treks through the second year of its five-year plan to transition from “Made in China” to “Designed in China,” a report from the U.S. Chamber of Commerce called the roadmap for China’s efforts an intricate web of new rules “considered by many international technology companies to be a blueprint for technology theft on a scale the world has never seen before.”

According to the report, China seeks to “enhance original innovation through co-innovation and re-innovation based on the assimilation of imported technologies.” The government has stated it will target seven key industries for this technology advance:

Clean energy technology

Next-generation IT

Biotechnology

High-end equipment manufacturing

Alternative energy

New materials

Clean energy vehicles

To achieve this goal, the Chinese government and private sector will invest nearly $2 trillion by the end of 2015.

This technology march, by China and other emerging countries, has been accompanied by a rise in trade secret theft litigation, particularly in these core industries. In response to this growing threat of technology theft, many corporations, including those holding the lion’s share of America’s technological brain trust, have begun to invest more of their technology protection resources in trade secrets. These companies have come to realize that outside the U.S. legal protections for patent portfolios, designed to prevent competitors from practicing inventions that have been disclosed to them by the patents, are unreliable. Trade secrets, in contrast, are by definition not disclosed to competitors, thus potentially giving the innovator competitive advantages over the long term. Unfortunately, most companies have highly developed patent protection systems and resources, while their trade secrets infrastructure is significantly less so. It is becoming clear that the trade secrets portfolios of major companies are underappreciated, underdeveloped and underprotected. And, they’re leaking.

If your business leaders have pitched your board of directors on the justification for multimillion dollar projects on the assumption that “no one else has this,” only to discover afterward it isn’t true, you are not alone. U.S. corporations have made massive capital investments in research, technology and plants around the world on the assumption that their technology gives them a competitive advantage, only to learn later that competitors have neutralized that competitive advantage through theft of key technologies.

Then comes the fight. What starts as a simple flash drive gone AWOL, or a former employee making curiously effective sales calls, might appear to be a simple, discrete and containable problem. But more frequently, the problem turns out to be much bigger. Much more systematic theft has occurred, not only through the vehicle of defecting employees but also through computer system hacking, theft from equipment suppliers or joint venture partners and surreptitious surveillance of plant sites. And worse yet, the thief increasingly is a foreign company with little incentive to either play by the rules of U.S. litigation or to respect U.S. court judgments for damages and injunctive relief. Accordingly, handling trade secret theft as if it were any other typical lawsuit, in which one files, litigates and waits for a verdict, is not nearly sufficient to tackle the complex maze of concerns that arise in these international cases.

The battle that companies must fight is instead a multi-pronged, cross-disciplinary, simultaneously-executed strategy. It requires the right muscle from the very beginning to force the thieves to participate in a system of justice and recovery that they have no incentive to recognize. In the end, it must leave the thieves with no alternative but to pay the appropriate damages and return the stolen technology.

Case study: SFilm

SFilm has invested $750 million in developing a new method to make solar film that creates a multitude of new applications and vastly increases the potential market for solar products. Based on this breakthrough, SFilm built a new manufacturing plant. While the product has proven to be extremely profitable in the year since the factory opened, it will be years before SFilm recoups its R&D and plant manufacturing costs.

One year after the plant became operational, a Chinese company began selling solar film at a substantially reduced cost. Testing showed that the product has similar qualities to SFilm’s. While the Chinese company had manufactured traditional solar panels in the past, it has never been known as an innovative company and has never filed for any patents on its products.

Moreover, customers are reporting that they have received sales calls from a number of former employees of the company regarding this competitor, who are making claims about the technical similarities of the respective products. An internal investigation uncovers that at least one of the former employees appears to have copied internal documents on a USB drive just prior to leaving the company.

SFilm’s natural instinct is to assume (or at least hope) that the theft is limited to a single rogue employee, and thus can be dealt with quickly and discretely. But the company decides, wisely as it turns out, to build a strategy on the assumption that much more widespread theft of its technology has occurred, with much more active involvement by its Chinese competitor. SFilm realizes that an effective strategy, resulting in meaningful recovery of damages for the investments it has made in developing its trade secrets and effective return of the technology, hinges on its ability to craft and execute a broad-based litigation strategy involving both civil and criminal dimensions, as well as a parallel diplomatic/political strategy aimed at bringing appropriate pressure to bear and serving notice on its competitors and their governments that it is prepared to stand and fight to protect its technology.

Bring the fight

SFilm must first evaluate how and where to bring the fight. Given that the thief was a foreign company in a country with limited respect for U.S. judgments, SFilm must plan for a comprehensive litigation approach, including federal district court litigation, government involvement and foreign action.

Trade secret misappropriation is a state law question, and as a result, such cases are often brought in state courts. However, because SFilm’s defendant is located in another country, instituting federal litigation is likely preferable, as federal courts have more resources and experience to handle international issues, such as the Hague Convention and multi-country enforcement. It also may be easier for SFilm to enforce the decisions and verdict from a U.S. district court depending on the applicable international treaties and principles of comity.

If SFilm is unable to establish jurisdiction in district court, or if there are serious concerns regarding enforcement, whether stemming from a default judgment or the defendant’s home country’s disinclination to respect the judgment of a U.S. court, an action at the U.S. International Trade Commission (ITC) may be preferable. Among the relevant and key differences that the ITC affords is the ability to bring an action against the offending goods that are imported into the U.S. As a result SFilm need not establish personal jurisdiction over the defendant.

In addition, a successful ITC action will result in an exclusion order that prevents products manufactured with the stolen trade secrets from entering the U.S. SFilm also would benefit from the relative speed of ITC actions, as they generally take no more than 18 months. Of course, there are a number of unique considerations related to ITC actions, including the need to establish a domestic industry, an independent government attorney who is a party to the action and the possibility of presidential override.

Concerned not only about ongoing competition from the thief, but also about further dissemination of its trade secrets, SFilm seeks injunctive relief to force the return of its trade secrets and cessation of their use by the defendant. It determines its best chance of obtaining those goals is a U.S. district court action, due to the available remedies and a strong chance of establishing personal jurisdiction over the defendant. Litigation on the merits and implementation of a parallel political strategy are soon to follow, and these are the subjects of the next two installments of this series.